The United States Tax Code and Regulations (the “Code”) permits various advantages for like kind exchanges that have tax consequences. A like kind exchange transfers the tax basis from an asset which is retired or relinquished by the owner to another or newly acquired similar asset. For example, when an older vehicle is relinquished, the Code permits the tax basis for the vehicle to be transferred to a newly acquired vehicle. While the provisions in the Code for this type of transfer are fairly well established, they are highly procedural and form intensive. Typically, a Qualified Intermediary (QI) is used for the transfer. Often, a large amount of data must be transferred between the owner, the QI, and any third parties, to comply with tax requirements. The QI acts as a purchase and sales agent to accomplish the exchange without incurring tax liabilities.
A leasing and financing entity typically depreciates vehicles leased to consumers on an accelerated basis. The accelerated depreciation generally reduces the tax basis of the asset to below its sales value. Unless deferred, the sale of the vehicle realizes a tax gain by recapturing the accelerated depreciation. The leasing and financing entity thus receives the benefit of a tax deduction based on the accelerated depreciation rules taken in the early years of a vehicle's life, which would normally be repaid when the vehicle is sold.
Therefore, had the owner executed the purchase and sale with cash instead of through a like kind exchange, a tax on the gain would typically be paid by the owner upon disposition of the vehicle based on the difference between the proceeds received and the tax basis of the vehicle. A typical example of a like kind exchange is an exchange of four older cars worth $5,000.00 apiece (with a tax basis of $3,000 apiece) for a new car valued at $20,000.00. The value of the exchange must be recorded so that it can be shown that the four specific vehicles were exchanged for the new vehicle and the tax basis of the relinquished vehicles becomes the tax basis of the new vehicle. The details of the exchange must be reported for tax purposes, and records must be kept of the transaction to resolve any questions with regard the specifics of the exchange and the amounts. No tax is due upon this exchange. If the cars in the above example were to be sold for cash, tax would be paid on the $8,000 taxable gain.
Managing the information related to a like kind exchange transaction with the above tax consequences is a difficult task, and typically requires the commitment of a large number of resources. For example, a vast amount of data must be collected, typically from data systems that are not easily integrated, and then used to generate information sufficient to track like kind exchange transactions. In addition, systems used for tracking data related to assets do not lend themselves to straightforward communication tasks, making it difficult to communicate instructions between parties. Further difficulties are encountered when attempts are made to harness the data related to assets involved in a like kind exchange to simplify regulatory reporting and form completion. Because the nature of the regulatory reporting and form completion is inherently complex and typically voluminous, it is highly challenging to provide a system to accomplish these tasks in a straightforward manner.